The dollar’s surge to its highest level since 2002 has resulted in billions in losses for US companies this year, from detergent makers to dating apps.
As earnings growth begins to slow, for some companies the additional currency effects will mean the difference between expansion and contraction for the remainder of the year.
Goldman Sachs’ index of US companies with primarily international exposure has fallen twice as much as its index of companies with primarily domestic operations, down about 15 percent and 7 percent, respectively, this year. For comparison, the international-focused index rose about 27 percent last year versus 30 percent for the domestic-focused index. In 2020 and 2019, the international index outperformed the domestic index.
Exchange rate effects, largely attributable to the dollar, may have hurt North American companies’ profits by about $40 billion in the first half of this year, according to financial technology firm Kyriba. That compares to about $8 billion in the first half of last year.
A strong dollar hurts sales for companies with large international businesses, reducing the value of their overseas earnings and making their products less competitive with local competitors.
Despite US inflation at a 40-year high, this year the dollar has hit its highest level since 2002 and is up about 9 percent this year, reflecting rising interest rates and better economic performance in the US than in the US attributed to the G10. Faster growth in the US than elsewhere has also resulted in revenue declines for companies with large international footprints.
Microsoft became the most prominent company to blame currency moves for a profit warning this month, cutting revenue forecasts by $460 million less than six weeks after publishing optimistic forecasts.
It’s not alone. Salesforce co-CEO Bret Taylor said last month that the company’s currency woes were “unprecedented” as it doubled its full-year forecast for the impact of foreign exchange rates to $600 million.
Retailer TJX cut its sales guidance by $700 million, while clothing brand Guess said “currencies would be the difference between our current expectation of a decline in operating profit and modest growth in operating profit.”
The dollar’s strength was driven by higher interest rates as well as the US’ faster economic recovery from the slowdown early in the coronavirus pandemic. However, both phenomena can change.
While the US Federal Reserve tightened rates faster than many of its peers, that will change when the European Central Bank hikes rates in July.
Growth in the US is also starting to slow and will fall further if the Fed hikes higher rates. “Everything indicates that unless there’s a big safe-haven move, we shouldn’t see that much outperformance in the dollar,” said Karl Schamotta, Corpay’s chief market strategist.
The dollar rises when the US outperforms its peers and when global growth slows as it attracts investors looking for safe haven assets.
Such a safe-haven move could be on the horizon. US data on Friday showed that consumer prices had risen faster than expected — 8.6 percent year-on-year — prompting investors in futures markets to bet on extremely aggressive monetary tightening from the Federal Reserve in the coming months.
Beginning Friday, investors are betting the Fed will hike rates in jumbo half-point increments at its next four meetings — June, July, September and November — before slowing to a quarter-point hike in December. The Fed’s goal is to slow the US economy, but some fear moves of this magnitude could plunge the country into recession.
“I don’t think the dollar run is over yet,” said George Goncalves, head of macro strategy at MUFG Securities Americas.
“People want it to be over so they can move on. This is usually a telltale sign that there is still more work to be done. I think we haven’t seen that liquidity event where we’ve seen that scramble for dollars that typically occurs in risk-off events.”
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